Outsourcing Grows as a Business Strategy

Market pressures are looming at every corner of the globe and corporate executives are doing whatever they can to bring down costs in order to be more competitive. Before the economic slowdown, companies used to send non-core work to low-cost countries. But as the state of economies worsen, firms started to see offshore outsourcing in a different perspective.

A growing number of companies are sending core business operations overseas. In the auto industry, General Motors (NYSE:GM) plans to build 23% of the cars it sells in the U.S. in low-cost countries over the next five years, up from current statistics of 15%. According to numerous reports in the first quarter of this year, technology firm International Business Machines Corporation (NYSE:IBM) also plans to boost its offshoring activities. The following month, IBM issued a press release announcing it had renewed and extended its EUR 3.2 million outsourcing contract with Amway GmbH for three additional years.

Firms have started to incorporate outsourcing in their business strategies. Publicly traded companies experienced a surge in key financial indicators whenever they publicize plans of outsourcing business operations or functions. In fact, the Wall Street Journal reported that Sprint Nextel Corporation (NYSE:S) is in final discussion to outsource management of its cellular network to Telefon AB LM, a move that would transfer 5,000 to 7,000 U.S. jobs to the equipment vendor. A day later, investors responded by sending shares of Sprint up sharply.

Intel Corporation (NASDAQ:INTC) will be closing some assembly and testing plants that are not cost-efficient and will outsource its Southbridge chips to Taiwan-based Advanced Semi-conductor Engineering Inc. (NYSE:ASX). Intel predicts the deal will increase its operating revenue by 40% in the second quarter of 2009 compared to its previous quarter.

As more and more companies move work overseas, offshore service providers are rushing to get a chunk from the incoming opportunities. Dallas-based Affiliated Computer Services (ACS) wants one-half of its workforce in offshore locations in an effort to keep up with rivals such as Wipro Ltd. (NYSE:WIT), TCS, and Infosys (NASDAQ:INFY). In the last quarter of 2008, ACS announced its plan to move higher-level IT jobs offshore. Back then, ACS has an estimated 63,000 workforce where 20,000 or about 32% are in offshore locations. Today, the company still has about the same percentage of workforce in offshore centers in China, Malaysia, India, and the Philippines but in greater numbers.

A 50-50 split in local and offshore operations is an aggressive strategy by ACS as U.S. President Obama announced just last week that he plans to end tax breaks to firms shifting jobs overseas. Such political pressure led student loan company Sallie Mae (NYSE:SLM) to move 2,000 offshore jobs back to the U.S. during the next 17 months.